IBM operating income falls by 18% as it offloads semiconductor unit

IBM reported lower-than-expected earnings for the third quarter of 2014, with revenue down by 4% year-on-year

IBM reported lower-than-expected earnings for the third quarter of 2014, with its revenue of $22.4bn down by 4% from the same period in 2013 – missing market estimates of $23.37bn. Its pre-tax income from continuing operations decreased by 12% to $4.4bn.

The tech giant reported an 18% fall in its operating net income for the period and saw revenues tumble across its software, hardware and services segment.

The company blamed an “unprecedented change of pace in the industry” and a slowdown in customers’ IT purchases for the drop in income. IBM chairman, president and chief executive officer Ginni Rometty said the company is disappointed with its performance, but is continuing to adjust its strategy. 

“While we did not produce the results we expected to achieve, we again performed well in our strategic growth areas – cloud, data and analytics, security, social and mobile – where we continue to shift our business. We will accelerate this transformation,” she said.

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IBM’s cloud revenue was up by more than 50% year-on-year and its cloud-delivered-as-a-service segment was up by 80%. Revenues from its business analytics division increased by 8%, while its security division revenue was up by 20%.  

But its hardware revenues plunged in the third quarter. Revenue from its systems-and-technology segment was down by 15%, ending in a pre-tax loss of $99m. Within this, revenue from Power Systems were down by 12%, revenue from System z mainframe server products decreased by 35%, and revenue from storage business was down by 6%.

In a bid to turn around the company's fortunes, IBM is steering itself to become a services company and has offloaded its x86 server business to Lenovo and is divesting its semiconductor operations

The divestment will help the company focus on research and development for its cloud and services assets. For instance, the company is planning to invest $1.2bn to build 15 datacentres in Europe to propel its cloud services.

“We are executing on a clear strategy that is moving IBM to higher value, and we've taken significant actions to exit non-strategic elements of the business,” Rometty said. “We will continue to make the investments and the changes necessary to manage our business for the long term.”

We will continue to make the investments and the changes necessary to manage our business for the long term

Ginni Rometty, IBM

Among other divisions, its services revenues for the third quarter of 2014 remained flat, while software revenues were down by 2% to $5.7bn.

Revenues from IBM’s key middleware products – which include WebSphere, Information Management, Tivoli, Workforce Solutions and Rational products – were $3.7bn, down by 1% from the third quarter of 2013.

Offloading semiconductor operations

While filing its earnings report, IBM confirmed it is offloading its semiconductor business and manufacturing operations to Globalfoundaries. According to a Wall Street Journal report, IBM will pay the manufacturer $1.5bn to take the chip operations off its hands.

IBM’s chip-making unit reportedly loses as much as $1.5bn a year, and its revenue – which accounted for just 2% of IBM’s revenue in 2013 – fell by 17% in the first half of 2014, according to a company filing. The deal with Globalfoundaries will close in 2015.

According to analysts, selling less profitable parts of the business, such as the chip-making unit, will help IBM in achieving the goal of increasing margins as revenue growth slows. They also said to remain competitive IBM would have had to spend billions of dollars to keep its semiconductor plants up to date with newer chip technology.

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